Discussion:Bad Debt Writeoff Question

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Discussion Forum Index --> Advanced Tax Questions --> Bad Debt Writeoff Question
Discussion Forum Index --> Tax Questions --> Bad Debt Writeoff Question

Daapower (talk|edits) said:

11 January 2008

I have a client who has a day job with a W2 of $120k, he also has a side business. He made a loan of $40k to someone in return for landscaping job for his side business and interest. The borrower made a few payments and did the landscaping but then filed Chapter 7. The client doesn't have enough positive capital gains to write off a personal bad debt as a STCL. Repayment consisted of landscaping (valued at $15k) then principal paydown of $40k plus interest on the $40k amortized and due in 5. Only 2 months of payments were made before default. If the client writes it off as personal bad debt he can only write off $3k since there isn't enough positive capital gain to offset. There were notarized signed notes and the client is also waiting to see if there is funds to be released from the BK trustee. There was actually collateral (3 trucks and a trailer) assigned to the loan but the value of the collateral has gone down and also hasnt been released from the trustee.

Since the loan was made with the purpose to get cheap landscaping, is there any way to write it off as a business expense under his side business (the apartment). he is a sole proprietor of the apartment so can the loss can carry over to offset the W2 salary of $120k

Michaelstar (talk\|edits) said:	11 January 2008
No - this is clearly a non business bad debt for your client. It can not be classified a business bad debt due to the fact that the t/p borrowing the $$ used it in his business. Tough lesson but hopefully a lesson just the same.

Daapower (talk\|edits) said:	15 January 2008
great, thank you for the response

Murrsg07 (talk\|edits) said:	2008-01-15
I now have a f/up question about this same subject: can this TP file Sch D and attempt to offset part of $40,000 loss based on his $120k W-2???

Rgtaxservice (talk\|edits) said:	15 January 2008
...under his side business (the apartment). he is a sole proprietor of the apartment... What side business? Is he just a landlord?

Michaelstar (talk\|edits) said:	15 January 2008
Unless the t/p has other capital gains to offest against this s/t capital loss - he will ONLY be able to carry $3,000 of this loss to page 1 - form 1040 to offset other income. The unused $$ will c/f to the following year and be used accordingly. If your question is can he offset the entire $40k s/t capital loss against the $120k W-2 income - no.

BEGooding (talk|edits) said:

January 15, 2008

You have no write off until you determine how much, if any, will be recovered from the BK trustee. Bad debts can't be written off until it is determined they are entirely worthless.

When the time comes, the taxpayer may "attempt" to write off a STCL against his W-2 income; but you will find, if you prepare schedule D correctly, that he will be limited to net capital losses of $3k/year to offset his W2 income.